17 March 2014 Inflation in Nigeria eases to 7.7% y/y in February

Inflation falls to 7.7% y/y in Feb. Inflation in Nigeria dropped to 7.7% y/y in Feb 2014, from 8.0% y/y in Jan and Dec, which represents a low since at least late 2007. The CPI figure for Feb was also close to our forecast of 7.9% y/y, and remained broadly in line with the projected medium term inflation path. In m/m terms, consumer prices increased 0.5% – below the average monthly inflation levels typically recorded in Feb in recent years – and extended the benign 0.3.-0.8% m/m range that has prevailed since early 2013.   Food inflation at 9.2% y/y. Food inflation declined marginally to 9.2% y/y in Feb, from 9.3% y/y in Jan and Dec, and eased to 0.6% in m/m terms, from 0.8% and 0.9% in the same time frame. The monthly print was also below the average m/m inflation recorded in Feb over the past few years which appeared to be driven by muted farm produce price pressures. Food accounts for 50.7% of the CPI basket making Nigerian inflation particularly sensitive to climatic and exogenous factors, although the relatively stable food price dynamics over the past year (in a 9.2%-11.0% y/y range) suggest this is less of a concern at present. Interestingly, imported food inflation (13.3% of the CPI basket) stood at 7.2% y/y in Feb, from 7.0% y/y in Jan and 7.1% y/y in Dec, in line with a multi-month stationary path that has probably been supported by a stable exchange rate and contained global food and oil prices.   • All items less farm produce inflation rises to 7.2% y/y . All items less farm produce inflation reached 7.2% y/y in Feb, from 6.6% y/y in Jan and 7.9% y/y in Dec, while it stood at 0.5% in m/m terms, from 0.2% m/m and 0.8% m/m, respectively. This means that the m/m CPI figure in this category was moderately below the average monthly inflation print recorded in Feb since 2009 (0.8%), albeit higher than the 0.1% and 0.0% registered in Feb 2012 and Feb 2013. Annual inflation in the most relevant sub-categories actually declined modestly in Feb and remained subdued (utilities [16.7% of the CPI basket]: 5.2% y/y; clothing and footwear: 7.1% y/y; furnishing and equipment maintenance: 6.7% y/y; transport: 6.4% y/y). Given these metrics, it is likely that the pick-up in annual “all items less farm produce” inflation was the product of an increase in y/y processed food inflation, although the NBS does not report the time series for this sub-group. • Core inflation climbs to 8.0% y/y.  Our measure of core inflation (“All items less farm produce and energy”) rose to 8.0% y/y in Feb, from 7.0% y/y in Jan and 7.9% y/y in Dec. In m/m terms, it accelerated slightly to 0.9%, from -0.1% and 0.7% over the same period, which again appears to reflect an increase in processed food consumer prices. Overall, core inflation has remained subdued since early 2013 despite the loose fiscal stance and ample excess liquidity in the financial system, pointing to a low money multiplier in the economy. Additionally, such dynamics have been supported by the resilience of the NGN, a still restrictive formal monetary stance and administered prices in a number of sectors. • Single-digit inflation to persist. Based on the current m/m trend, our projections suggest that inflation will remain in single digits in the medium term and may well stabilise with a  7% handle in H1:14 (7.5% y/y in March), before edging up moderately in H2:14. The upside risks to this outlook stem from a potential readjustment of the mid-point (155) of the RDAS FX band coupled with a move higher in interbank USD/NGN (164.8 on 14 March) and a new leg of fiscal expansion ahead of the 2015 elections, as well as a less likely shift towards a more accommodative monetary stance. • Market implications. The modest drop in the Feb inflation figure is unlikely to intrinsically affect the yield curve, as has been the case over the past year, especially considering the bearish positioning in the Nigerian market. In fact, rates have actually backed up in recent weeks as foreign investors exited Nigeria and domestic accounts pushed up yields, especially at the short end (364-d T-bill yield up to 15.6% on 17 March). There is also a possibility that the MPC meeting scheduled for 24/25 March may tighten monetary and liquidity conditions further to slow the erosion of FX reserves (30-d moving average at USD38.8bn on 12 March), ease the pressure on the exchange rate and boost the incentive to hold NGN-denominated assets. In this context, we suspect market players will be on the cautious side this week and that the T-bill auction on 19 March will see primary market yields rise further to more appealing levels. However, the long end of the curve has not re-priced as aggressively as the short end (Jan 22s currently around 14.1%) because of the continued bid from Nigerian pension funds; the substantial CPI-adjusted yields on offer will probably extend this supportive bias and cap the back-up in bond yields that we still expect in the medium term.   Samir Gadio & Ayomide Mejabi